April 12, 2011

A number of investors and more recently some members of the Federal Reserve Board are concerned the Fed’s QE policies will lead to high inflation in the not-too-distant future. I’m on record as saying high inflation isn’t an imminent threat. There’s too much extra capacity in the economy, especially in the housing market. Hiring and wage increases still are weak. For a more detailed explanation of read the exposition by Barry Ritholz. It collects all the key points, such as that much of the extra cash the Fed created is sitting on bank balance sheets and the velocity of money is very low. Commodity investors need to beware. Instead of loading up because they anticipate higher inflation they should consider the strong relationship between commodity prices and the Fed’s buying treasuries.